Defending the Indefensible
Prerequisites: Unintended Consequences, Human Action, Understanding Competition, When is Trade Beneficial?
Economists are eternally tasked with defending the indefensible counterintuitive things that seem bad but may have hidden benefits. Indeed many economists consider the chief task of economics to explain the unintended consequences of actions.
Sweatshops - Sweatshops are on their face bad places to work. They pay their workers a few dollars a day and work them for hours on end to make products we Americans might find in a store. The working conditions in them are often appalling and dangerous. But any good economist asks - what is the alternative? The answer to that is subsistence farming, the most brutal difficult form of life yet known to humanity, but don't take my word for it. People who choose to work in the sweatshop know what they are getting themselves into. They know what their former life was like, and yet they sign up to work at foreigner run factories. Imagine if aliens came to earth, and forbid us from doing any form of production, because by their standards, it is too difficult and low paying, and instead of giving us an alternative, they simply let us starve. How would you feel? Thankful that the aliens "saved" you from your current job? Of course not. Taking away someone's work that they choose willingly is never doing them a favor. So what are activists to do? Give the people they care about a better alternative - open a factory of your own, figure out a way to increase their productivity or find a better way for them to live. Don't take away the best alternative a group of people has to lift themselves out of dire poverty and then pat yourself on the back.
I have an opportunity cost theory of wages. You get paid an amount equal to the productivity of the next best job you could be doing. Suppose you are in a competitive industry where you have lots of alternate opportunities for employment. Your wage will be pretty close to your productivity. If a firm offers you (much) less than your productivity another firm will offer more to take advantage of the profit opportunity by getting more out of a worker than they pay. If on they other hand, you don't have many other options, and the firm knows it, they can offer you a much lower wage than your productivity since they know you don't have any other choice. This is the predicament of a working in a developing country without a lot of choice in terms of employment. Once excess workers at the lower wages are scarce, firms will be forced to bid up wages to attract workers away from other firms. Wage growth will go from fairly slow to explosive. That is the empirical pattern of industrialization. At first conditions are poor and wages are low. Eventually, they grow very rapidly.
Why is wage growth in China able to outpace economic growth? Because it was depressed by the floods of workers coming in from the countryside who had very low opportunity costs. The other fact that people fail to account for is that the main reason why wages in the developing world are low is because they don't make a lot of valuable stuff. If they were really productive, why couldn't they go into business for themselves, make stuff and sell it at the market rate and pay themselves high wages? If it were truly so profitable to hire workers at dirt cheap rates and sell shoes to rich westerners, why hasn't a native entrepreneur done it? Not only are workers malnourished and uneducated, but culturally they are not used to working in factory conditions.
Finally, foreign direct investment increases the growth rate of the country as a whole and teaches workers skills they can apply to other jobs. Like any empirical test of growth, the evidence for FDI increasing growth is mixed, but on the whole seems to indicate that it improves growth by increasing the rate of technological transfer between countries.
Economists are eternally tasked with defending the indefensible counterintuitive things that seem bad but may have hidden benefits. Indeed many economists consider the chief task of economics to explain the unintended consequences of actions.
Sweatshops - Sweatshops are on their face bad places to work. They pay their workers a few dollars a day and work them for hours on end to make products we Americans might find in a store. The working conditions in them are often appalling and dangerous. But any good economist asks - what is the alternative? The answer to that is subsistence farming, the most brutal difficult form of life yet known to humanity, but don't take my word for it. People who choose to work in the sweatshop know what they are getting themselves into. They know what their former life was like, and yet they sign up to work at foreigner run factories. Imagine if aliens came to earth, and forbid us from doing any form of production, because by their standards, it is too difficult and low paying, and instead of giving us an alternative, they simply let us starve. How would you feel? Thankful that the aliens "saved" you from your current job? Of course not. Taking away someone's work that they choose willingly is never doing them a favor. So what are activists to do? Give the people they care about a better alternative - open a factory of your own, figure out a way to increase their productivity or find a better way for them to live. Don't take away the best alternative a group of people has to lift themselves out of dire poverty and then pat yourself on the back.
I have an opportunity cost theory of wages. You get paid an amount equal to the productivity of the next best job you could be doing. Suppose you are in a competitive industry where you have lots of alternate opportunities for employment. Your wage will be pretty close to your productivity. If a firm offers you (much) less than your productivity another firm will offer more to take advantage of the profit opportunity by getting more out of a worker than they pay. If on they other hand, you don't have many other options, and the firm knows it, they can offer you a much lower wage than your productivity since they know you don't have any other choice. This is the predicament of a working in a developing country without a lot of choice in terms of employment. Once excess workers at the lower wages are scarce, firms will be forced to bid up wages to attract workers away from other firms. Wage growth will go from fairly slow to explosive. That is the empirical pattern of industrialization. At first conditions are poor and wages are low. Eventually, they grow very rapidly.
Why is wage growth in China able to outpace economic growth? Because it was depressed by the floods of workers coming in from the countryside who had very low opportunity costs. The other fact that people fail to account for is that the main reason why wages in the developing world are low is because they don't make a lot of valuable stuff. If they were really productive, why couldn't they go into business for themselves, make stuff and sell it at the market rate and pay themselves high wages? If it were truly so profitable to hire workers at dirt cheap rates and sell shoes to rich westerners, why hasn't a native entrepreneur done it? Not only are workers malnourished and uneducated, but culturally they are not used to working in factory conditions.
Finally, foreign direct investment increases the growth rate of the country as a whole and teaches workers skills they can apply to other jobs. Like any empirical test of growth, the evidence for FDI increasing growth is mixed, but on the whole seems to indicate that it improves growth by increasing the rate of technological transfer between countries.